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CHAPTER-1 INTRODUCTION

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CHAPTER-1 INTRODUCTION 1 INTRODUCTION, PURPOSE AND OBJECTIVE 1.1 Background Globalization presents many challenges to existing businesses worldwide. Organizations realized that in order to survive and
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CHAPTER-1 INTRODUCTION 1 INTRODUCTION, PURPOSE AND OBJECTIVE 1.1 Background Globalization presents many challenges to existing businesses worldwide. Organizations realized that in order to survive and grow, they needed to have a sustainable competitive advantage and need to focus all their energies and resources on building this advantage. Prahalad and Hamel (1994) stated through their theory of core competence that companies should not try to be good at everything but should concentrate on their core competencies, leaving the rest to others who are best at doing that. Globalization also meant that companies had to be cost efficient. If you do not focus on costs, someone who is cost competitive will take away your customers by delivering the same value at a lower price. Thus, companies began to restructure their businesses in such a way to focus on their capabilities and make the process more cost efficient. As a measure to remain globally competitive, companies started outsourcing. Outsourcing has become the mainstay of today s business reality. Employee skill sets and their consistent delivery capability is the corner stone of successful outsourcing setup. Along with the dynamic growth comes the challenge of keeping up the momentum and motivation among its employees. Human Resource Management plays a key role in the success of an outsourcing setup. This study aims to look at the various challenges and prevalent Human Resource practice in the outsourcing (ITeS-BPO) industry in India Concept and Evolution of Outsourcing In the 1970 s, the outsourcing of the Information Technology (IT) function started to happen on a wider scale due to the high cost of processing. In the late 1980, the information system trade press first coined the term outsourcing to describe the growing dependence by firms on outside providers for on-going IT support. Today, the term is more widely defined as contracting for any of company s recurring internal functions with outside vendors. The crux is that the vendor rents his skills, knowledge, technology, service and manpower for an agreed price and period to perform functions that the client no longer finds it beneficial to perform it himself. P a g e 1 The term outsourcing is used when firms contract manufacturing or services to third party vendors, either with in the country borders or offshore, who offers specified service for a particular period of time at an agreed price. Outsourcing has existed for many decades in manufacturing sector, though outsourcing in services is a recent phenomenon. Services outsourcing occurs when organizations contract out services to a third party vendor either domestically or offshore. This is also widely known as Business Process Outsourcing (BPO), which in essence means the delegation of ownership, administration and operation of a business process or processes to a external service provider. The external service provider in turn manages and administers the process or processes in adherence to some measurable performance metrics. These services can be delivered domestically or from abroad. Outsourcing benefits from the key advantage of specialization. If a service or component can be more effectively provided by specialist than it can be handled in-house, then both the entities can focus on what they do best and continuously enhance performance (Adler, 2003) Perspective on Outsourcing Outsourcing has long been viewed as a make versus buy decision. Traditionally, this was the relative benefit derived in economic terms on a decision of making a particular component or service, against buying it. Management theorists believed that the competitive advantage can be maintained by identifying core and non-core functions and transferring the non-core functions to a specialist. These discussions evolved across time and gave birth to the concept of virtual organization, which essentially meant that the organizations should transfer non-core functions to a specialist and focus on its core functions. The management literature has often argued that non-core functions of a firm should be outsourced (e.g., Hamel and Prahalad, (1990, 1994); Venkatesan (1992), Quinn and Hilmer (1994). An organization, it is argued, should primarily concentrate on its core-competence areas, from which it benefits in terms of cost or a monopolistic advantage, and outsource the manufacture of other products. The words of Tom Peters, as quoted by Salvetti and Shell (1995) goes as do what you do best, outsource the rest . Porter s value chain concept, drawing on industrial-organization economics, encouraged decision makers to shift their focus from the cost of component to the profit P a g e 2 opportunity associated with the underlying activity and decide whether the user should be in the business of producing the part/service (Porter, 1980) ITeS-BPO- Definition The term IT enabled Services (ITeS) and Business Process Outsourcing (BPO) are often used inter-changeably. However, strictly speaking, ITeS primarily involves outsourcing of business processes (domestic or offshore) that can only be packaged with IT. These services are delivered through a platform of telecommunication or data network or other electronic media. ITeS is therefore a subset of BPO. Although, usually BPO is associated with lower end call center work, there has been an evolution over the past few years in the outsourcing business to include higher end knowledge process outsourcing (KPO). This study for convenience uses ITeS as a broad term to include ITeS, BPO outsourcing and off shoring Classification of ITeS-BPO Services ITeS-BPO can be classified in terms of the geographical reach. Offshore outsourcing is when the specialist services are contracted outside the company s own country. Nearshore outsourcing is when the services are contracted in the neighboring country and onshore outsourcing is when the services are contracted within the borders of the company s own country. Yet an another trend is on moving the work to the rural areas, where the overheads and costs are much reduced as compared to cities; this phenomenon is called rural outsourcing. Rural Outsourcing is the concept of utilizing the talent of professional people who choose to live in rural areas. By using rural outsourcing, company s costs are reduced as people work for lesser wages, because the cost of living for them is lesser than the people who live in urban areas, or big cities. This is a great alternative to offshoring as the projects remain in one s own country and still overall spending is reduced. Call centers, which are an integral part of the ITeS-BPO industry, has emerged as the India s new sunshine sector. These firms also handle a host of activities including responding to credit card enquiries, preparation of invoices, payrolls, cheques, P a g e 3 reconciliation of daily accounts, medical transcriptions, processing applications, billing, and collections (Babu, 2004). The ITeS-BPO definition includes both voice in-bound and out-bound and nonvoice services, which can include data entry and analysis, payroll generation, benefit administration and accounting functions (Srivastava and Theodore, 2006) Rationale of ITeS-BPO ITeS-BPO covers diverse areas like finance, HR, telecommunication, healthcare, administration, manufacturing etc. Equipped with technology and manpower, these services are provided from e-enabled locations. There is a substantial enhancement in service standards and radical reduction in costs. The ITeS-BPO processes migrated to India brings about a saving of around 40-60% of the cost (NASSCOM, 2002, 2004, 2006). Cost saving may vary from industry to industry and country to country, but most expert estimates ranges between 30-60% (Pagadala, 2004). The key source of India s advantage lies in the labor cost differential (NASSCOM 2003) and the advancements in software technology along with the availability of a large pool of well-trained professionals who can speak fluent English (Chengappa and Goyal, 2002; Ramchandran and Voleti, 2004; Saini and Budhwar, 2004). The developments in the supporting infrastructure like telecom and internet has facilitated the process and contributed to the growth. The promise of cost savings will always remain fundamental. However, two important factors namely; adverse currency movements and wage inflation in India have contributed to reducing the operating margins of vendors. The Indian currency has significantly appreciated compared to the US dollar since 2002 a trend that is likely to continue in the near future. The inflationary pressures on operating cost are also unlikely to relent; therefore it s prudent to conservatively estimate the effective savings to be in the range of % (Nasscom-McKinsey, 2005). Although corporations continued to purchase non IT- enabled BPO services, in the last decade, the IT-enabled services in general and the ITeS-BPO services offshoring in particular, have witnessed the highest growth and attracted the most attention. IT enabled Services is thus a revolutionary IT offshoot which can look after a diverse range of outsourcing needs IT-enabled service has made it possible to carry out services and business process at a different geographical location other than where the actual P a g e 4 market or demand for such services exists. Due to the rapid progress in the field of internet and telecommunications infrastructure as well as data processing, these services can now be offered to clients from an offshore facility as well The ITeS-BPO as a Value Adding Proposition The organization s belief in value proposition provided by ITeS-BPO is demonstrated by the increasing number of global contracts and alliances focusing on outsourced service delivery. ITeS-BPO suppliers over and above reducing costs, provide expertise, assist in enhancing clients services, and increase the profits. The parties involved in a BPO relationship i.e. the client and vendor organizations need to comprehend mutual goals, capabilities and values before entering into an outsourcing partnership in order to take advantage of the arrangement (Feeny et al., 2005). The relational view of outsourcing (Dyer and Singh, 1998) emphasize that to achieve a win-win situation, there is a need to have shared goals and mutual understanding of processes and decisions between the client and vendor organizations. The key element of the partnership is in the client understanding the vendor s end of the BPO market. For example, issues such as HR, technology, and training may directly affect clients operations. The client is in a better position to negotiate contracts, make strategic decision about ownership, handle competition and build long term relationship with vendors if he comprehends the offshore BPO markets. For example, when global companies setup their own captive BPO centers at offshore locations, the understanding of the dynamics of the BPO industry in such locations may be immensely valuable. 1.2 Contextual Framework of the Indian ITeS-BPO Industry The changes in the Indian economy had a critical role to play in the development and prospering of IT sector and eventual percolation to BPO industry. The mixed economy approach followed by India up to 1991 did not provide the right environment to nurture entrepreneurship and competitiveness. The Indian economy based on a centralized approach hit the bottom in the year During that time India experienced a doubledigit rate of inflation, decelerated industrial production, a very high ratio of borrowing to the GNP, and a dismally low level of foreign exchange reserves. The foreign reserves P a g e 5 were barely sufficient to cover the cost of three weeks imports. The foreign exchange requirements of the Indian government were met by pledging gold to the Bank of England. The multilateral bodies like World Bank and the International Monetary Fund (IMF) agreed to bail out India on the condition that it changed from a regulated regime to a free market economy. This dawned the new era of liberalization, where the government announced a series of changes in the economic policies starting with the devaluation of the rupee, followed by new industrial, fiscal, and trade policies. Control over the banking sector and foreign investments were eased and public sector underwent major reforms. After these reforms, the economy has become dynamic and vibrant, and foreign reserves have gone up significantly (Budhwar et al, 2006). The outsourcing industry had come to be viewed as the primary engine of the country s development over the next few decades, contributing broadly to GDP growth, employment growth, and poverty alleviation (Srinivasan, 2006). These reforms provided the trajectory for India to launch itself as a superpower in the ITeS-BPO industry in the early twenty-first century. The already established IT sector and availability of large number of technically literate English speaking people provided the right ingredients for this growth ( Budhwar et. al, 2006). The large IT companies assisted the ITeS-BPO industry in expanding its base. The IT giants were able to offer a wide spectrum of services primarily leveraging on the broad skill sets and global clientele. There has been a remarkable improvement in the type of services being offered by Indian companies from the simple beginnings. Presently, Indian companies are offering a range of services including customer care, medical transcription, medical billing services and database marketing, to Web/sales marketing, accounting, tax processing, transaction document management, telesales/telemarketing, HR hiring and biotech research. According to NASSCOM Strategic Review 2011, ITeS-BPO is now the fastest growing industry in India. Today, India is considered as the electronic housekeeper of the world since most of the outsourcing services from India are typically provided by ITeS- BPO. The Indian ITeS-BPO industry has matured and grown across time (Babu, 2004).In just over two decades, the industry has grown to reach nearly US$ 59 billion in export revenues, employs around two million employees, and accounts for approximately 55 percent of the worldwide BPO market (NASSCOM-2011, Strategic P a g e 6 Review). There are around 784 Indian ITeS-BPO companies registered with NASSCOM (Singh et al, 2009). The main activities or areas covered by the Indian ITeS-BPO organizations include customer care, such as remote maintenance, help desk, and sales support; finance and administration, data analysis, medical transcription, insurance claim processing, and inventory management; HR and payment services including payroll, credit-card services, cheque processing, and employee leasing. In addition, the BPO industry has expanded into engineering and design, animation, market research, network consultancy and management, remote education, and content development (i.e., digital content, LAN networks, and application maintenance). BPO activities, where knowledge processing is required are on the increase. Some examples of KPO include intellectual property research, legal and medical research, R&D, analytical services like equity research, information security services such as risk assessment and management, bioinformatics (for example, genome sequencing, protein modeling, and toxicology studies) procurement and global trade (Ramachandran and Voleti, 2004; Singh, 2005a; Ravichandran, 2005; Christopher, 2005). 1.3 Contribution of ITeS-BPO to the Economic Growth in India According to a NASSCOM study reviewing the impact of IT-BPO industry over a decade brought to light the multifold contribution made by the industry on the various social and economic parameters in India. The Indian ITeS-BPO industry has contributed significantly to Indian economic growth in terms of GDP, foreign exchange earnings and employment generation (NASSCOM Impact Study, 2010). The intangible impact, which is equally significant, is the ripple effect created in the national and international economic space. The industry set the stage to unleash the hitherto untapped entrepreneurial potential of the middle class Indian and took Indian excellence to the global market Direct Contribution to the Indian Economy The emerging role of ITeS-BPO industry in the Indian economy is well established. ITeS-BPO is considered as the fastest growing segment among the services sector, which in turn fuels the key economic indicators of the country. Some of the indicators where there is a direct contribution are: P a g e 7 (i) Growing Share of the Country s GDP: The sectors contribution to the Indian GDP has continuously increased. It grew from 1.2% in FY98 to an estimated 6.4 % in FY2011. The industry contributed almost INR 15,000 crores in direct taxes (NASSCOM, Strategic Review, 2011). Additionally, the cascading effect of the sector s operating and capital expenditure was estimated to be around USD 30 billion, while consumer spending effect from its employees amounted to INR 76,000 crores in FY2010. (ii) Growing Exports Boost the Foreign Exchange Reserves: Exports comprise two third of Indian IT software and services revenue, with the ITeS-BPO share nearly 24 percent. It is one of the most important channels for bringing foreign currency into the country and accounted for almost 14 percent of the total Indian exports in FY2010. Its contribution to Indian exports (merchandise plus services) grew from less than 4 percent in FY1998 to almost 26 percent in FY2011. (iii) Enhancing The Image Of India In Global Market: The ITeS-BPO industry has played a key role in transforming the image of India from a slow moving bureaucratic economy to a land of world class technology, business service providers and innovative entrepreneurs. (iv) Generating Employment Opportunities: Direct employment in the industry is expected to reach nearly 2.5 million in FY 2011 and indirect job creation is estimated to be at 8.3 million. The direct jobs provided by the industry has been growing at a CAGR of 26 percent making it the largest employer in the organized private sector of the country. (NASSCOM, Strategic review 2011). The industry has played an important role in empowering a wide spectrum of human assets. Out of the total employed in the industry 76 percent are less than 30 years of age, 4 percent come from economically backward section, over 45 percent of total employee constitute women, 60 percent of companies offer employment to differently-abled people and 58 percent of total employed are originally from Tier-2/3 cities (NASSCOM Strategic Review 2010). P a g e 8 1.3.2 Indirect Contribution to the Indian Economy The growth of the ITeS-BPO industry has not only boosted the image of India in the global markets but also resulted in certain wider impacts and set the benchmarks for other sectors in the economy. (i) Additional Employment Generation: It is estimated that 4 additional jobs are created in the economy for every 1 job created in the IT-BPO industry creating indirect employment opportunities. The indirect workforce include people working in housekeeping, providing transportation, security personal, catering staff etc. The employment created in the industry has social significance as nearly three-fourths of the workforce employed by major service providers to ITeS-BPO are SSC/ HSC or less educated. (ii) Driving Growth of Other Sectors of the Economy: ITeS-BPO provides a multiplier effect of 2 to the other sectors of the economy through its non-wage operating expenses, capital expenditure and consumption spending by its professionals. According to a study by CRISIL in 2007 for every Re.1 spent by the IT-ITeS industry (on domestically sourced goods and services), translates into a total output of about Rs 2 in the economy. This is due to derived demand from capital and operating spends at firm-level and consumption spending by professionals employed in this industry, such as real estate, telecom and retail by creat
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